Fitch: Mortgage underwriting looking better, but still needs work

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The U.S. RMBS (residential mortgage-backed securities) sector has seen some rather substantial improvements recently, though the pace of progress remains slow and challenges still remain, according to Fitch Ratings in its latest Structured Finance Progress Report.

Residential mortgage underwriting has improved dramatically since the financial crisis, with the performance of recent vintage mortgage loans the best on record thus far, according to Rui Pereira, managing director at Fitch.

“New legislation has completely eliminated some problem loan types like no documentation loans and has increased the liability of lenders that make irresponsible loans,' said Pereira.

Another notable contrast is the quality of loan-level data available at issuance, which has been expanded and standardized. “Third-party review and verification of the loan file documentation prior to issuance has become standard industry practice and is a definite plus for RMBS,” stated Fitch. “These factors allow for more reliable credit analysis and earlier detection of negative credit trends. “

However, some areas of mortgage underwriting still need more attention, including the long-debated issue of reps and warranties in new deals, according to Fitch. “While there have been notable improvements for rep and warranty enforceability, a lack of standardization across transactions is keeping investors wary,” said Pereira. “The sector also remains vulnerable to political and regulatory risk, namely outside-of-trust settlements and government actions that affect cash flow to investors.”

The U.S. RMBS progress report is the latest in a series Fitch plans to publish that discusses significant changes the sector has undergone since the financial crisis.